The Agenda – July 2017

Super Funds not Disclosing Remuneration Correctly

Remuneration and governance news

ASIC announced this month that it had approached 21 superannuation funds for failing to disclose required remuneration and governance information on their websites. Two of the super funds had assets exceeding $10 billion while the remaining 19 were smaller funds.

Five funds had failed to disclose the remuneration of the funds’ trustees and executive officers on their websites. Two funds disclosed trustee information in bands rather than on an individual trustee basis.

Remuneration information has now been disclosed prominently for four of the five funds (with the last fund now wound up). The two funds that had disclosed remuneration in bands have since disclosed individual remuneration.

Rules requiring the disclosure of trustee and executive officer remuneration have been in place since 1 July 2014.

Draft Legislation to hold Super Directors Accountable

The government has released draft legislation that if implemented will hold the trustees of superannuation funds accountable for breaching duties to members, bringing their accountability in line with Directors of managed investments.

Such duties (in summarised form) include to:

  • Act honestly in all matters concerning the entity;
  • Perform Directors duties and exercise powers in the best interests of beneficiaries and give priority to the interests of the beneficiaries when conflicts arise;
  • Not do anything to prevent Directors or trustees from performing their functions and exercise a reasonable degree of care and diligence to ensure the covenants are met.

Currently, contraventions of these duties are not an offence, although they can give rise to a claim for loss or damages by affected members.

Under the draft legislation, trustees of superannuation funds will face fines if they contravene covenants in the governing rules of the entity. Serious breaches of the director’s duties (such as those involving intentional or fraudulent contraventions) may constitute a criminal offence punishable by up to 5 years imprisonment.

The legislation also mandates annual meetings for members and gives APRA heightened powers to take action against underperforming superannuation funds.

Spotlight on Consulting Fees Paid to Directors and Related Entities

Exploration company Capital Mining was this month asked to clarify future and past payments to its Directors following a query to the ASX.

The ASX was concerned that the company had consistently underestimated corporate and administration costs, while overestimating exploration costs.

Potentially exacerbating this concern was the fact that the company had ongoing service arrangements with a company owned by two Directors which amounted to a figure per annum well in excess of Directors fees. In addition, Directors received “consulting fees” for conducting executive duties outside of their non-executive roles.

The ASX query appeared to create shareholder uneasiness about the quantum of the past and proposed payments. The day after the company posted its responses to the ASX query, it announced that due to shareholder feedback resulting from the query it had decided to reduce the consulting fee paid to Directors for their executive work. It had also decided to change the arrangement with the company owned by the Directors from a retainer fee to a performance-based fee.

Without making any judgments in this case, it does highlight that Boards must carefully consider whether to outsource work to companies owned by Directors, and whether additional payments made to Directors above their Directors fees are appropriate.

In addition, it is important to correctly disclose remuneration paid to Directors (including to related parties of Directors) and the material terms of any employment, service or consulting arrangements with a Director or a related party of a Director. This case reveals that the regulator will take action if it is concerned about remuneration arrangements and their disclosure.

Tension in the Public Service on Pay Rises

Analysis published in the Canberra Times has revealed a dichotomy in public service pay. Remuneration for the Public Service’s Senior Executive Service (SES) 3 band grew 64% over a decade. The SES 1 and 2 bands grew by 44% and 50% respectively. In comparison, APS and executive level roles experienced pay rises of 32% and 36%.

The Australian Public Service Commissioner John Lloyd blamed unions for the difference, stating that protracted enterprise bargaining had stopped pay rises from occurring. The CPSU claimed, on the other hand, that the difference came down to the executive remuneration policy, which includes market factors and references the private sector.

 Technology Having a Downwards Effect on Pay Packages

Globalisation (including robotic automation) isn’t the only trend keeping pay rises down, according to an analysis reported this month in the Australian Financial Review. Mobile apps and online job marketplaces have made it easier than ever for employers to connect to job seekers and hire them on a non-permanent basis.

This connectivity and the shift towards flexible, part time hours have reduced the bargaining power of workers, it argued. The flexibility may also have lured workers who were previously retired or not participating in the workforce, increasing employee supply.

The effect of the wage pinch is expected to spread from jobs in industries such as manufacturing to lower skilled workers and white collar workers.

Directors Acting Reasonably will be Protected by the Courts

In RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756,  the Federal Court re-affirmed that it will protect and defend the decisions of directors acting reasonably and in the best interests of the company.

The Millner family is a major shareholder in both Brickworks and Soul Pattinson and Robert Millner is chairman of the two companies.

Perpetual, an institutional shareholder in both Brickworks and Soul Pattinson, argued that the family’s ties between the companies ran so deep that the companies were in effect run as family businesses and thereby oppressive to shareholders as the relationship disenfranchised minority shareholders, entrenched the incumbent boards, and suppressed the share price in both companies.

Justice Jagot found that:

  • Perpetual “acquired its shares knowing the cross shareholding existed and, in its capacity as an institutional investor, presumably understood the implications of it”, and, while “it is possible that the cross shareholding has contributed to shares in the companies trading at below net asset value per share …  whether that is so or not has not been demonstrated to date”.
  • the cross-shareholding agreement which had been in place since 1969, “may reasonably be seen as having provided each company with material benefits as a result of diversification which has reduced earnings volatility.”

Justice Jagot endorsed the views that:

  • “reasonable directors” are best placed to make commercial decisions in the interests of shareholders.
  • It is not for the Court to intervene by putting itself in the place of reasonable directors acting with “the best interests of the company firmly in mind”.

Perpetual had not proved oppression.